Monday, May 23, 2016

Kenya cuts rate 100 bps as inflation seen in target range

Kenya's central bank cut its Central Bank Rate (CBR) by 100 basis points to 10.50 percent, saying inflation is expected to decline and remain within the target range in the short term, which means "there was policy space for an easing of monetary policy while continuing to anchor inflation expectations."
The Central Bank of Kenya (CBK), which raised its policy rate by 300 basis points in 2015 in response to a fall in the shilling's exchange rate and a rise in inflation, added that inflation data showed there were "no significant demand pressures in the economy" and the foreign exchange market had remained stable, supported by a narrower current account deficit.
Earlier this month Patrick Njoroge was quoted as saying the central bank had room to start easing its policy as inflation was falling back within the target range of 2.5 percent to 7.5 percent.
Kenya's consumer price inflation rate eased to 5.27 percent in April from 6.45 percent in March, with the 3-month annualized non-food-nonfuel inflation rate down to 4.6 percent in April from 6.8 percent in March. Since November last year, the shilling's exchange rate has remained relatively stable, with the central bank attributing this to a narrowing of the current account deficit on improved earnings from tea and horticulture exports, strong diaspora remittances and a lower bill for oil imports. The shilling was quoted at 100.9 to the U.S. dollar today, up 1.4 percent since the start of the year. Kenya's current account deficit was estimated at 6.8 percent of Gross Domestic Product in 2015, down 3 percentage points from 2014, and is expected to narrow further this year, the CBK said. Foreign exchange reserves at the central bank amounted to US$7.688 billion, up from $7.377 billion at the end of March. In March the International Monetary Fund approved a $1.5 billion precautionary arrangement and the CBK said this arrangement, together with its reserves, "will continue to provide adequate buffers against short-term shocks."

The Central Bank of Kenya issued the following statement:

The Monetary Policy Committee (MPC) met on May 23, 2016, to review recent
economic developments, and the outlook for the domestic and global economies. The
Committee noted the following:
 Month-on-month overall inflation fell to 5.3 percent in April 2016, from 6.5 percent
in March, and was within the Government’s target range. This decline was largely
due to reduction in the prices of food items and fuel.
Month-on-month non-food-nonfuel
(NFNF) inflation also declined to 5.8 percent in April from 6.0 percent in March.
The CPI category alcoholic beverages, tobacco and narcotics contributed 1.1
percentage points to NFNF inflation in April, reflecting the revised excise tax
introduced in December 2015. Significantly, the 3-month annualised NFNF inflation
fell from 6.8 percent in March to 4.6 percent in April, indicating that there were no
significant demand pressures in the economy.
 The foreign exchange market has remained stable, supported by a narrower current
account deficit due to lower oil imports, improved earnings from tea and horticulture
exports, and strong diaspora remittances. The current account deficit was estimated at
6.8 percent of GDP in 2015, a reduction of 3 percentage points from 2014, and is
expected to narrow further in 2016.
 Foreign exchange reserves of the Central Bank of Kenya (CBK) currently stand at
USD7,688.3 million (equivalent to 5.0 months of import cover) up from USD7,377.2
million (equivalent to 4.7 months of import cover) at the end of March 2016. These
reserves, together with the Precautionary Arrangements with the International
Monetary Fund (IMF) will continue to provide adequate buffers against short-term
shocks.
 The coordination between monetary and fiscal policies continues to support
macroeconomic stability. The National Government budget deficit is expected to
narrow in FY2015/16 thereby easing pressure on interest rates.
 The banking sector is resilient and has begun to stabilise following the successful and
quick reopening of Chase Bank, which has enhanced confidence in the sector.
Furthermore, the CBK’s enforcement of existing regulations particularly with respect
to the classification of loans, has strengthened and increased transparency of the
banking sector.
 The ratio of gross non-performing loans to gross loans was 8.2 percent in April 2016,
partly reflecting better reporting standards. The CBK will continue to monitor credit
and liquidity risks, which remain concerns.
 The performance of the economy remains strong, posting a growth of 5.6 percent in
2015, from 5.3 percent in 2014. The MPC Market Perception Survey conducted in
May 2016, shows that the private sector remains optimistic supported by
macroeconomic stability, stronger agriculture performance, public infrastructure
investment, and tourism recovery.

 The outlook for global economy has deteriorated in recent months due to weaker
growth prospects in advanced and emerging market economies. Uncertainties in the
global financial markets have increased due to risks posed by, among other factors,
slower growth in China, the timing of the U.S. Fed’s next increase in interest rates,
and the outcome of the referendum on U.K. membership of the European Union
(Brexit). However, the growth outlook for Kenya’s main trading partners in the
region remains strong, suggesting better prospects for exports performance.

The Committee noted that overall inflation is expected to decline and remain within the
Government target range in the short-term. Therefore, it concluded that there was policy
space for an easing of monetary policy while continuing to anchor inflation expectations.
The MPC therefore decided to lower the CBR by 100 basis points to 10.5 percent. The
CBK will continue to monitor developments in the economy, and will use instruments at
its disposal to maintain overall price and financial sector stability."